Wednesday, April 19, 2017

Let the Tanzanian buyer beware, times change

Patrick O. Creary

In Summary

It is this basic need for sustenance, which underpins economies. Adam Smith, the famous economist of ‘The Wealth of Nations’ fame, talked of the power of “rational self-interest” to regulate market forces.

His basic premise says that, if allowed to operate without interference, markets would find equilibrium through the nature of humans to do such things, which are in their best interest. This concept guides the free market theory.

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By Patrick O. Creary pcreary@ali-ge.com

The recurrent human need for sustenance takes us in many and varied directions. Constrained by life’s necessities, we strive amongst rivals, in ever-increasing magnitude of effort, to attain our share of the economic pie.

It is this basic need for sustenance, which underpins economies. Adam Smith, the famous economist of ‘The Wealth of Nations’ fame, talked of the power of “rational self-interest” to regulate market forces.

His basic premise says that, if allowed to operate without interference, markets would find equilibrium through the nature of humans to do such things, which are in their best interest. This concept guides the free market theory.

We see the principle unfolding each day as men and women, driven by their need, compete against each other to survive, often enduring unpleasant jobs, or relationships, even making sacrifice to deity, in the hope that such offerings joined with their fervent supplication, would ensure sustenance, in this life or the next.

But is the theory true? Do people do what is in their best interest in order to eat bread? Not always. Yet before disregarding the theory, we may wish to consider the operative word, “rational”. It is when humans act with reason in pursuit of their economic interest that the theory approaches closer to the truth.

The stark reality is that humans are sometimes irrational. Even so, when people act with sufficient thought, their actions produce a barometer, which we may use to gauge economic activity. In fact, such actions may even become a vital self-regulating influence upon the market; so the theory propounds. Yet often there are unexpected outcomes.

Taking a more nuanced approach to understanding the concept, we may extrapolate from the principle of rational behaviour to determine how humans may act, given a set of predictable measures. We may say for example, that the market indices would perform the same way whether humans were acting with rational self-interest; or indeed, believe they were doing so. One may assume that in either case the same market forces would come into play, were it possible to judge across the divide between rational and irrational behaviour.

Debatable results aside, it is the desire to win, to be selfish, and to strive against our neighbours, which advertisers and businesses in general, seek to exploit. They know that we can be coerced into rational or irrational actions. And thus the maxim becomes true, “Let the buyer be aware”. This propensity for excesses in markets is what compels authorities to regulate them; curbing antitrust monopolistic tendencies, and the cyclical irrational exuberance, such as the housing crisis in the US over a decade ago, which brought the global economy to a standstill.

Speculators, presuming they were acting in their best interest, or fooled into believing so, purchased overvalued houses, which they could least afford; often paying three or four times the real value, with the hope of flipping them for a profit. By lifting the historic regulations that prevented bankers from participating in predatory lending, the market was left to its own devices, and the results became evident.

Here in Tanzania, the prevailing market forces are somewhat less consequential, as most consumer products are inelastic; by this I mean there is always a substitute which would release the price pressures on specific items offered to consumers. Yet as the economy becomes increasingly modernised, global economic forces will come into play, and with them we will see the regulatory agencies becoming more vigilant in curbing possible multinational excesses.

One does not need to be a student of economics to believe in the impending change. While Tanzania is moving more judiciously than other countries in attracting foreign investments compatible with its developmental objectives, consumers still need to be mindful of acting rational when making economic decisions. For us, we are betting on the public that our choice to engage in producing books for readership is a rational decision. We are not perturbed by doubt, or the prevailing habits; for we share the belief that in the fullness of time each person will come to see that it is in their rational self-interest to read books.